Tax Court determines Emotional distress damages taxable since not derived from physical injury

Tax Court determines Emotional distress damages taxable since not derived from physical injury In Barbato v. Comm., TC Memo 2016-23, the U.S. Tax Court determined that a taxpayer who was awarded damages by the Equal Employment Opportunity Commission for her emotional distress for discrimination against her constituted taxable income. The court ruled that she did not meet Code §104(a)(2) requirements for excluding damage awards from gross income. §104(a)(2) excludes damages received for personal physical injury or physical sickness from gross income. Because emotional distress is not considered a physical injury or physical sickness, taxpayers must include damages they receive for emotional distress in their gross income unless the damages are paid for medical care attributable to the emotional distress. §104(a). Only "damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under Code Sec. 104(a)(2)." See also Treas. Reg. §1.104-1(c)) In Barbato, the taxpayer had been a U.S. Postal Service (USPS) letter carrier who incurred injuries to her neck and back in a job related car accident. Her physical limitations required her to switch from a letter carrier to an office position at the USPS. She was eventually reassigned to carrying mail but her old position caused her to have more pain. When she complained, she was discriminated against. As a result, she claimed severe stress and emotional difficulties as a result and was awarded $70,000 by the EEOC for the emotional distress caused by the discrimination. The administrative Judge ruled that she suffered from depression, anxiety, sleep problems, and post-traumatic stress disorder, and that the conditions were caused by and/or exacerbated by the actions which were found to be discriminatory. The Tax Court found that the damages did not fit within the exclusion provided in §104(a)(2) and thus were taxable. The Tax Court said that the EEOC decision was clear that the damages USPS paid to the taxpayer were for emotional distress attributable to discrimination. The $70,000 in damages for emotional distress was "proximately caused by the discrimination" of USPS' employees and not for emotional distress attributable to a physical injury or physical sickness. The decision clearly stated that the taxpayer’s "significant physical distress and pain" "were exacerbated by non-discriminatory actions."

NO CLOTHING DEDUCTION FOR WEARING RALPH LAUREN CLOTHING

NO CLOTHING DEDUCTION FOR WEARING RALPH LAUREN CLOTHING In Barnes, TC Memo 2016-79 (Apr. 27, 2016), the Tax Court has held that a salesman for Ralph Lauren who was required to wear Ralph Lauren branded clothing at work could not deduct the cost of the clothing for federal income tax purposes as unreimbursed employee expenses. Since the Tax Court found that the clothing was clearly suitable for regular use, the Court denied the deduction and imposed penalties on the salesman as well. By way of background, pursuant to I.R.C. Sec. 262, a taxpayer generally cannot deduct personal, living, or family expenses. But, I.R.C. Sec. 162(a), does permit a deduction for all ordinary and necessary expenses paid or incurred in carrying on any activity that constitutes a trade or business, which may include the trade or business of being an employee. Primuth v. Comm., 54 T.C. 374, 377 (1970). Clothing expenses are generally nondeductible expenses under Code Sec. 262 even though the clothing is worn by the taxpayer in connection with his trade or business, unless: (1) the clothing is required or essential in the taxpayer's employment; (2) the clothing is not suitable for general or personal wear; and (3) the clothing is not so worn. Hynes v. Comm., 74 T.C. 1266, 1290 (1980) There was also a 20% accuracy-related penalty applied pursuant to I.R.C. Sec. 6662(a) since there was an underpayment of tax attributable to negligence, disregard of rules or regulations. The Court found there was no reasonable cause for the understatement so the exemption from the penalty under I.R.C. 6664(c)(1) did not apply. The Tax Court ruled that it has consistently applied the 3-part test for clothing deductibility and that Ralph Lauren clothing clearly fails the test.

Whistleblowers Do Not Get Paid For FBAR Civil Penalties

Whistleblowers Do Not Get Paid For FBAR Civil Penalties In a recent case entitled: Whistleblower 22716-13W, 146 T.C. No. 6 (2016), the Tax Court determined that the $2 million nondiscretionary award threshold under I.R.C. Section 7623(b)(5)(B) is not met when turning someone in for failing to file a Foreign Bank Account Report (FBAR) (Form TD F 90-22.1) under 31 U.S.C. Section 5321(a). The amounts owed pursuant to 31 U.S.C. Section 5321(a) are not to be included because they are not taxes in the I.R.C. In Whistleblower 22716-13W, the petitioner sought an award and filed Form 211, Application for Award for Original Information with the Whistleblower Office of the IRS. The taxpayer that was turned in pled guilty and paid an FBAR civil penalty on his Swiss Bank accounts. But the Tax Court ruled that a whistleblower is only eligible for a nondiscretionary award under Section 7623(b) “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed” $2 million (Section 7623(b)(5)(B)). Since FBAR civil penalties are imposed and collected under a different Title of the U.S. Code (31 U.S.C. section 5321) they do not constitute “additional amounts” for purposes of ascertaining whether the $2 million threshold has been met. The court did, in fact, concede that the statute would offer stronger incentives to whistleblowers if FBAR civil penalties were included like tax liabilities for purposes of whistleblower award eligibility under Section 7623(b)(5)(B). The court ruled though that it was up to Congress to determine eligibility for the award, not the Court.